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Drug Money and Bank Lending: The Unintended Consequences of Anti-Money Laundering Policies

Tomas Williams (), Pablo Slutzky and Mauricio Villamizar-Villegas ()
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Pablo Slutzky: University of Maryland

Working Papers from The George Washington University, Institute for International Economic Policy

Abstract: CWe explore the unintended consequences of anti-money laundering (AML) policies. For identification, we exploit the implementation of the SARLAFT system in Colombia in 2008, aimed at controlling the flow of money from drug trafficking into the financial system. We find that bank deposits in municipalities with high drug trafficking activity decline after the implementation of the new AML policy. More importantly, this negative liquidity shock has consequences for credit in municipalities with little or nil drug trafficking. Banks that source their deposits from areas with high drug trafficking activity cut lending relative to banks that source their deposits from other areas. We show that this credit shortfall negatively impacted the real economy. Using a proprietary database containing data on bank-firm credit relationships, we show that small firms that rely on credit from affected banks experience a negative shock to investment, sales, size, and profitability. Additionally, we observe a reduction in employment in small firms. Our results suggest that the implementation of the AML policy had a negative effect on the real economy.

Keywords: money laundering; organized crime; financial system; bank lending; liquidity; economic growth (search for similar items in EconPapers)
JEL-codes: I15 O15 Q12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-dev and nep-fdg
Date: 2019-05
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Persistent link: https://EconPapers.repec.org/RePEc:gwi:wpaper:2019-5

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